The days of assured returns are over. Like other countries, India is also moving towards a system where returns would be a function of the risks taken. And that's why we have a 'New Pension Scheme', which is a contribution scheme rather than a benefit scheme.
The New Pension Scheme that is going to replace the defined benefit system is likely to change the dynamics in which your provident fund money was being saved over the years.
This is a defined contribution system. The central government is setting a Pension Fund Regulatory Development Authority for this purpose. Here are the details.
Coverage -- Though it has been assumed that this scheme is applicable only to government employees, this is not the case. For government employees, who joined after April 1, 2004, this scheme is compulsory. State governments too have opted for this scheme.
Even employees of autonomous bodies have the choice of joining this scheme. However, those who are covered by the Employee Provident Fund Act are not allowed to join the NPS.
Contribution -- The defined contribution scheme offers two types of contributions: Tier-I contribution that is compulsory with tax benefits and tier-II contribution that is voluntary with no tax benefits. Tier-I contribution is 10 per cent of salary (basic+dearness allowance).
The government will also make matching contribution. For employees of autonomous bodies, the autonomous body may make matching contribution. Private sector employees can also make such a contribution, if they wish to do so.
A government employee can contribute more than 10 per cent if one is willing to do so, but the government will contribute only 10 per cent of the salary.
Further, tier-II contribution is voluntary, but this contribution can be made only after tier-I commitments have been met. Moreover, tier-I contribution cannot be withdrawn before the age of 60 years whereas tier-II contribution can be withdrawn at any time.
Of course, you need to remember that once you are covered under NPS, you are not eligible for either provident fund or gratuity. The only benefit you will receive is your accumulated contribution in new pension scheme.
Personal Retirement Account -- One has to create a personal retirement account and one is allotted a Personal Pension Account Number. The member's contribution into this scheme will go to his PPAN.
Central Record-keeping Agency -- The record-keeping, administration and customer service functions for all the members of this pension scheme will be centralised and performed by the Central Record-keeping Agency.
This agency will issue PPAN to members. Members can access their PPAN from anywhere in India and even, from anywhere in the world. CRA will issue periodic statement to the members. All these facilities will be provided for a fee.
Point of presence -- They are the service providers for members and offer a host of services. POP will collect contribution from the members and will transfer it to the Pension Fund Manager.
Banks, post offices, depository participants and other secure entities that are capable of electronic connectivity with the CRA will serve as POPs. For central government employees, the pay and account offices will serve this function.
Pension Fund Manager -- The PFRDA will appoint professional pension fund managers who will invest the money on behalf of members. The PFM will also charge a fee for this service to the members. Initially, the PFRDA will issue six licenses. PFMs are expected to offer three kinds of products--safe, balanced and growth products.
Under the safe scheme, money will be invested only in government bonds. Under the balanced scheme, the money will be invested mainly in government and corporate bonds and partly in equities.
Under the growth scheme, money will be invested mainly in equities and the rest in government and corporate bonds. Returns are not specified under any schemes. Member can switch from one scheme to another at any time. A member is free to choose and invest through more than one PFM.
But as the PFRDA is still not set up, during this interim phase, the Controller General of Accounts and Central Pension Accounting Office will look after the money and will pay 8 per cent interest during this period.
No Tier-II contribution will be accepted during this phase. Government servants who have joined before April 2004 also have the choice of joining NPS.
